How Are an Employee’s Fringe Benefits Taxed?

Build business credit, monitor credit health, and accelerate growth — all with Nav Prime. Sandra Habiger is a Chartered Professional Accountant with a Bachelor’s Degree in Business Administration from the University of Washington. Sandra’s areas fringepay of focus include advising real estate agents, brokers, and investors. She supports small businesses in growing to their first six figures and beyond. Alongside her accounting practice, Sandra is a Money and Life Coach for women in business.

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The type or range of benefits might also relate to the specific type of position an employee has. Show candidates that you prioritize their happiness and wellbeing both inside and outside of work. Provide employees with services designed to meet their everyday needs—from childcare to food delivery, travel & more.

How Are an Employee’s Fringe Benefits Taxed?

So bonuses or reimbursements for expenses paid while on the job are considered taxable. These benefits must be included on an employee’s W-2 each year, and the fair market value (FMV) of the bonus is subject to withholding. Calculating your employees’ fringe benefit rates might seem daunting, but the process is actually quite straightforward. Understanding how to calculate fringe benefits becomes simple once you have a detailed record of the various benefits your employees receive throughout the year. One of the most important parts to keep organized is payroll taxes—a process made much simpler with the help of well-designed payroll software. Fringe benefits typically include health insurance, retirement plans, paid time off, tuition reimbursement, and other amenities.

For Hourly Employees

• In today’s competitive job market, fringe benefits play a pivotal part in attracting and retaining top talent.
• Gift certificates that are redeemable for merchandise or have a cash equivalent value are not considered de minimis benefits and are taxable.
• Some benefits may include a company car, paid time off, or gym membership.
• For example, if you already offer health insurance to your workers, consider adding dental and vision.

Common fringe benefits are basic items often included in hiring packages. Most fringe benefits are taxable at fair market value but some benefits, such as health and life insurance, are nontaxable. As an employer you can choose to estimate total annual taxes payable by the employee and distribute it over every paycheck. In addition to these government-sponsored programs, some employers offer health plans—one of the most desired benefits—to their employees. Companies that fund their employees’ health insurance plans do not have to withhold Social Security, Medicare, FUTA, and federal income taxes from that benefit. Fringe benefits are generally considered taxable income if the employer pays them to their employees in cash.

Tax Resources

If an applicant is between one job offer with a salary and another offer with the same salary plus benefits, they are likely going to accept the latter offer. To take advantage of an employer’s fringe benefits in the most effective way, employees need to understand how common fringe benefits are taxed. No, fringe benefits are on top of the normal hourly wage or salary an employee earns.

Are Businesses Required to Offer Fringe Benefits to Employees?

When determining an employee’s total pay structure, employers need to calculate the dollar value of fringe benefits provided. The value of fringe benefits is also used to ensure compliance with labor laws related to minimum compensation and overtime pay. As the employer, you are typically responsible for withholding and reporting taxes on these benefits.

Fringe benefit rates are specific percentages of the benefits received in relation to the employee’s salary or wages. Understanding these calculations will provide you with a ton of valuable information. Proper fringe benefit calculations are essential for employers paying prevailing wages on public works contracts. Labor laws dictate these government-funded construction projects’ total compensation, including fringe pay. So, in summary, fringe benefits run the gamut from health insurance to gym memberships in terms of their purpose and value to employees.

Fringe benefits are forms of compensation, usually non-cash, that full-time employees get in addition to their salaries. They improve life at work and/or outside of work, which is attractive in a changing job market where workers are valuing work-life balance and company culture more and more. Employers offer a wide range of fringe benefits as a recruitment or retention strategy. These benefits can make up a substantial portion of an employee’s total compensation. Some employees may benefit from certain benefits more than others, and you may feel like you’re wasting money on benefits that aren’t used. In addition, it’s hard to take away a benefit once you’ve offered it, even if it proves to be financially impossible to continue.

As a small business owner, you may choose to provide your workers with additional benefits on top of their regular pay rate. Offering these benefits can be an effective way to recruit and retain top talent, but some benefits could be taxable. To avoid unnecessary surprises at tax time, it’s important to understand how these benefits work, which benefits are legally required, and how to identify which benefits are taxable.